Notorious student loan bank closes

WASHINGTON -- The nation's most notorious student loan maker, the Bank of Horton in rural northeast Kansas, failed yesterday and was closed, but not before its bad loans cost taxpayers $250 million.

In the late 1980s, the bank in Horton, population 2,177, was the country's second-largest originator of government-guaranteed student loans. Many of those loans were funneled to questionable trade schools and fly-by-night academies, forcing taxpayers to swallow huge losses when students didn't repay the money.

"Over the years, we probably guaranteed $500 [million] to $600 million in loans for that bank, and I guess that a full 60 to 65 percent of those loans went bad," said Val Vikmanis, president of the Higher Education Assistance Foundation, the guarantee agency that, along with taxpayers, paid for the defaults. "We wound up paying default claims on a horrendous share of those loans."

Because taxpayers pay at least 80 percent of any defaults (and often more), conservative estimates are that the bank's escapades will cost taxpayers $250 million, based on Mr. Vikmanis' figures.

That doesn't include the $30 million or so the Federal Deposit Insurance Corp. figures it will pay to make sure the bank's depositors don't lose their money.

This spring, regulators took the unusual step of announcing that they had taken control of the Bank of Horton and were combing through its books to see whether it was solvent. Yesterday, they announced that the bank wasn't solvent, and it passed into history.

Kansas State Bank in nearby Holton outbid three other banks to take over $155 million in the Bank of Horton's deposits. It will reopen the bank today as the Horton branch of Kansas State Bank.